SUMMARY
The Financial Stability Oversight Council (FSOC) is a multi-agency organization born of the Great Financial Crisis. Its designed mission is to study financial innovation and operations to protect taxpayers, consumers, and market participants from unchecked, potentially systemic risk. Yesterday the group released a long-awaited report on digital assets, especially exploring cryptocurrency and stablecoin financial markets’ risks and opportunities. Council members pointed to three areas in which they want new congressional authorities, identified existing powers to regulate this space, and agreed to coordinate enforcement activities, including with state entities. The report and fact sheet are here.
Regulators Identify Crypto Powers, Vulnerabilities, and New Authorities Needed
Subprime mortgages were the last globally embraced, broadly adopted financial innovation to force regulators into action. The FSOC yesterday pointed to unregulated risks in the digital asset space with potential to cause systemic harm, even as the same technology and products offer significant upside flexibility to consumers. The report notes an increasing interconnection between digital assets and the regulated financial system (trading, custodial, and intermediation).
The report makes clear the FSOC doesn’t believe state and other indirect regulation addresses their systemic risk concerns. It lists powers regulators assert currently exist, asks for new authorities from Congress, and encourages member agencies to coordinate more closely. The request to Congress is aimed at reducing regulatory arbitrage which incentivizes risky and illicit behavior.
Congress is highly unlikely to produce digital assets legislation this year. Three factors bear watching as drivers of whether and when the Legislature grants the Executive new powers. First, the 118th Congress balance of power likely will be divided giving opponents of new regulation an ability to slow, squash, or water-down possible legislation. Second, a few court cases brought by the SEC eventually will set some parameters of existing authority and possibly what can be legislated. Finally, a systemic shock to financial stability would spur action on the Hill.
